When it comes to borrowing money, it’s vital to understand that your credit score will be affected. We recently discussed whether you can get a loan with a bad credit score and learned if you have bad credit, generally between 300 to 560, you will more than likely be subjected to paying higher interest rates with less lenient loan terms. Whereas you may be approved for a loan, it might not be the most cost-effective loan. With a bad credit rating, you’ll also likely have higher insurance premiums, and you may even have difficulty renting an apartment or getting a job. Some businesses run credit checks on prospective employees.
When it comes to bad credit, we’re often left frustrated and stressed when searching the market to find a loan company that will accept us or one that may not check our credit score. This can be difficult. But often, Canadians turn to Payday loans to help them when in such a situation. We recently conducted a sentiment survey to discover that 65% of respondents have used Payday loans. If you’re looking for a few hundred dollars to help with a bill or for an emergency, a Payday loan may look enticing. Payday loans usually don’t require a credit check, and you’re usually approved quickly. Even though they are convenient, they can be costly. Let’s learn more.
What is a Payday Loan?
A payday loan is a small, short-term unsecured loan with high-interest rates. The term “payday” in payday loan refers to when a borrower writes a check postdated to the lender for the payday salary but received part of that payday sum in immediate cash from the payday loan lender. Payday loans offer quick approval are very easy to obtain which is what makes them attractive to borrowers. These loans only require the borrower to have a bank account and show a valid ID and proof of income to obtain a loan.
Payday loans, unlike a loan with a bank or other financial institution, do not require a credit check. This can make loans more accessible for lenders with bad credit. But since these loans are incredibly risky, due to the Payday loan lender not having any credit history, they can be more expensive and are difficult to pay back in the time allotted. In fact, the Consumer Financial Protection Bureau found that four out of five payday loan borrowers either default or renew the loan one or more times.
The payday lending business model relies on repeat borrowers; payday lenders get 91 percent of their revenue from borrowers who take out five or more loans. But rolling over loans can quickly lead borrowers into a debt trap. And payday loans are not cheap. According to the Government of Canada, payday loans incur high fees with the cost being equivalent to an interest rate of 500-600%. These high fees can make it harder for someone who’s already strapped for cash to pay their loan back, which can cause further financial difficulties and stress.
How Long Do Payday Loans Stay On Your Credit Report?
A payday loan is treated the same way any other loan is. So, for example, late payment or unpaid loan will stay on your credit file for a period of six years. This means that you need to wait for a period of time to see an improvement in your credit rating and score, in order to access lower interest options.
If you believe you are going to miss a loan repayment, you should always contact your credit provider first and see if they can help you. You can find out more about payment deferrals and options here. It could be the difference between an unpaid repayment and a late repayment. Lenders will likely view a late payment more favourably.
Will Taking Out A Payday Loan Directly Affect My Credit?
The act of just taking out a Payday loan will NOT directly impact your credit score. Like any other loan or financial product, you must pay it back on-time, with all required principal and interest payments. Most fast-cash loan agencies like Payday loans will not report to the credit reporting agencies. This is also because the loans are generally for the short-term which would make it pointless to report.
Even though your Payday loan may not be reported to the credit bureaus; TransUnion & Equifax, if you don’t pay back your loan, it will have a negative effect on both your credit report and rating. If you don’t make a payment, your account may go to a collection agency which will trigger the Credit Reporting Agencies reporting, and a derogatory mark will be made on your credit file. This will lead to a decrease in your credit score. So, like any loan, a Payday loan will only directly impact your credit if you don’t pay it.
How Can A Payday Loan Hurt My Credit Score?
As discussed, a payday loan will only affect your credit score in case you don’t pay back your loan, just like any financial product. The difference with payday loans is that this type of lender will ask you to write a postdated check corresponding with your next payday. If you don’t have enough money in your account when that day comes and you do not renew your loan, this will count as a bounced check. If you can’t pay a bounced check, your bank has cause to close your account and send this to a collection agency. The same way you will be sent to a collections agency if you can’t keep up with payments.
How To Avoid Taking Out Payday Loans?
Whereas Payday loans are easily accessible, they’re often a lot more expensive. This is due to the high interest and fees, this can cause many borrowers to default on their loans. If you’re living paycheque to paycheque there are somethings you can do to avoid a high-interest loan such as budgeting and improving your credit rating.
Improve Your Credit Score
It’s important to first understand what’s a good credit score in Canada before beginning to improve your bottom line. There’s a number of ways you can improve your credit rating to help gain approval for some lower interest loans.
Firstly, it’s recommended to use a secured credit card as a way to build or establish credit. You can also avoid making hard enquiries on your credit report. This means, don’t apply for a loan or credit card unless you think you’ll be approved. Each lender will perform a hard pull enquiry to check your creditworthiness before approving you for a loan.
You can also seek the assistance of a credit counsellor, or even check out credit building software such as Score-Up online here. 95% of our users see a credit boost in as little as 30 to 45 days.
The Bottom Line: Payday Loans And Your Credit Rating
To conclude, we learned that Payday loans will not affect your credit score by simply taking one out. If you don’t pay back your loans, it will go to a collections agency. It can then reported to the Credit Reporting Agencies. An unpaid payday loan can stay on your credit report for up to six years. This can have negative effects on your credit score. It’s important to try to avoid these types of high-interest short-term loans if you can.
Otherwise, wait to improve your credit rating by obtaining a secured credit card to boost your score. You should also try to consciously budget and save before considering a high-interest loan and alleviate all other options.